Dow Down 387? RTC? Deja Vu?

Déjà vu? The Dow down 387 on the anniversary of the RTC.
© Arthur Gahagan


Are we on the verge of a fourth government bailout? The big news today on a troubled Wall Street

is that the Dow Jones average is down 387 points. The housing news as of late has been bleak to

say the least. How appropriate is it that it comes 18 years to the day that the RTC was created.

The initials stand for Resolution Trust Corporation. It was a part of the Financial Institutions Reform,

Recovery and Enforcement Act of 1989. Congress passed this legislation and it became law on

August 9, 1989.


The Federal Government had acted twice before in 1933 and 1985 to bail out a troubled housing

sector. I will refer to that 1989 legislation by it’s initials FIRREA for the sake of brevity for this

article. What is important to know is how the housing situation of the 1980’s compares to the

housing situation we are dealing with today in the Summer of 2007. The federal government

charged the Resolution Trust Corporation with the duties of liquidating over 750 savings and loan

institutions that had become insolvement due in part to “loans gone bad.” In their disposition

of these ( S&Ls) as they were known, it also meant that over-inflated real estate was also disposed

of. Gee, over-valued real estate, loans in default, subprime lenders gone out of business,

lenders in bankruptcy proceedings, any of this sound familiar?


To provide a little background on why what is happening today on Wall Street is so important we first

must re-visit to see how houses were financed prior to the creation of the RTC 18 years ago.

The primary places to get house financing prior to RTC and 1989 was at banks and Saving’s & Loans.

A town or city would often have an S & L and or a Bank and people would go in and create huge savings

accounts. The saving’s & loans might pay 3-4% on these “passbook “ accounts and then they would turn

around and offer home loans at maybe 7% to customers for home mortgages or loans.


With the passing of a large number of these saving’s and loans, due primarily to bad loans, etc. Wall

Street became a huge player in house financing. Mortgage Brokers, Mortgage Bankers, Loan Officers, etc.

took the place of the loan officials from many of the now defunct S & Ls. Mortgage backed securities came

into existence and here we are today. Single mortgages would be originated and wind up in what are known as

“pool’s” and become a part of investing on Wall Street. Obviously the process is much more complicated than

what I’ve described here as I’ve tried to keep it simple.


The years 2001-2005 were 5 years of a fantastic run up in house prices in many parts of the country and

investing and speculation had run rampant. Many houses were financed with 100% financing instruments

and a good number of those are adjustable type loans. Defaults are raging and the problem will worsen

the rest of this year and all of 2008. With the massive number of subprime loans in default, do you think there

are any buyers on Wall Street, or any loans being originated to sell to Wall Street?

In my opinion, it has been the housing industry that has carried our economy over the past years in this new

century. Now that it is unraveling, how long until the dreaded “r” word appears? Having been in the housing

and mortgage business for over 28 years, I would not be surprised to see another federal rescue of the housing

sector.